Netflix reports strong Q1 earnings; approaching 25 million subscribers

Netflix's first quarter earnings reveal that the online streaming giant shows no sign of slowing down when it comes to earnings, revenue and the subscriber count.

Netflix reported first quarter earnings of $60.2 million, or $1.11 cents a share (statement). Non-GAAP earnings were $1.14 a share on a revenue of $718.6 million. Wall Street was expecting earnings of $1.08 a share on revenue of $703.6 million.

But the bigger news is that Netflix added 3.3 million domestic subscribers during the first quarter, which is "nearly double the number added in Q1 of 2010." That brings the grand total to approximately 23.6 million subscribers worldwide (or technically, the United States and Canada).

In a letter to shareholders, Netflix execs attribute that increase to the addition of the streaming-only plan that was added in late 2010:

Our pure streaming plan and a price increase on our hybrid offerings were put into place in November 2010, and the price increase largely took effect in Q1. As a result, our average subscription price increased sequentially from Q4 to Q1. During the quarter, new subscribers embraced the pure streaming and hybrid plans in roughly equal numbers. Going forward, we believe the ASP trend will revert back to slight Q/Q decline as pure streaming becomes a larger part of the overall subscriber mix.

Netflix will be pushing farther with its Watch Instantly online streaming service, which means that DVD shipments are expected to decline over the course of the year as DVDs are  "a fading differentiator" between Netflix and its competitors. Netflix execs noted:

We believe that DVD will be a fading differentiator given the explosive growth of streaming, and that in order to prosper in streaming we must concentrate on having the best possible streaming service. As a result, we are beginning to treat them separately in many ways. Already, if you look at our signup page for non-members, it is all about streaming. Having said this, DVD rental is still a great business for us, and we are working on solutions to make sure DVD continues to be a profitable business for us in the years ahead, but it is not core to winning in streaming at this point.

Key points:

• Netflix boasts that is "now the only online premium subscription service that offers shows from all four broadcast networks"
• Signed deals with Fox and Lionsgate for online streaming of full seasons of Glee, Sons of Anarchy and Mad Men
• Netflix will soon have original content, starting with House of Cards series, set to air in late 2012

By the numbers:

• Netflix has over 800,000 subscribers in Canada
• Free cash flow of $79.3 million
• Ended Q1 with $343 million in cash, cash equivalents and short-term investments

Netflix’s projected outlook for the second quarter called for net income of $762 million to $778 million, or $0.93 to $1.15 cents a share.

For the second quarter, Wall Street expects Netflix to deliver earnings of $1.19 a share on revenue of $763 million. For 2011, analysts are expecting earnings of $4.04 a share on revenue of $3.13 billion.

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